SFGate065

The End Of Hewlett-Packard As We Knew It? Revered company is between a rock and a hard place


Hal Plotkin, Special to SF Gate
Monday, November 19, 2001

URL: http://www.sfgate.com/cgi-bin/article.cgi?file=/gate/archive/2001/11/19/hpmerge.DTL

The brewing battle over whether Hewlett-Packard should merge with ailing rival Compaq signals a major turning point for the legendary Silicon Valley company.

History has often been unkind to firms that try to grow primarily by consolidation (that is, buying out competitors) rather than by innovation.

And unfortunately, companies usually can’t have it both ways.

If the pattern holds, the H-P/Compaq merger could mark the end of Hewlett-Packard’s proud days as a leading originator of new technologies and new markets.

Hewlett-Packard and Compaq both sell personal computers and other related products and services. Those supporting the proposed merger say joining the two firms will make the newly combined operation a more efficient competitor in the battle with even bigger rivals, such as IBM.

But in recent weeks, Walter Hewlett and David W. Packard, prominent descendants of H-P’s founders, have pledged to vote their shares against approving the deal. If a majority of shareholders join them, the merger will be canceled.

The heirs contend that combining HP with Compaq would reduce shareholder value by putting too many of the company’s eggs in the PC basket, where profit margins are thin to nonexistent. Some H-P heirs have also expressed worries about the damage that will be done to H-P’s vaunted reputation as a place where talented people want to work — especially if, as expected, thousands of workers are fired after the merger.

“Bill [Hewlett] and Dave [Packard] never developed a premeditated business strategy that treats H-P employees as expendable,” said David W. Packard, the founder’s son, when he announced his opposition to the pending arrangement earlier this month.

Packard is not just trying to be a nice, socially responsible guy. He’s also trying to help save the soul — and the future prospects — of the company his father helped create.

With the notable exception of Hewlett-Packard (and a small number of companies that enjoy virtual monopolies), very few large tech firms have managed to maintain leadership in technology markets for more than a few product cycles. In Silicon Valley, in particular, innovation is often inversely related to the size of a company.

Until relatively recently, Hewlett-Packard was one of the rare exceptions. H-P got its start in 1938 making audio oscillators for Walt Disney, but over the years it went on to create a wide variety of new technology products in unrelated markets. In 1968, for example, H-P popularized the first programmable scientific electronic calculator.

Over the next two decades, H-P became a leading maker of printers, personal computers and an astounding array of cutting-edge, high-tech medical and scientific devices. Although the specific products changed over the years, the one constant at H-P was innovation. For an unusually long period of time, H-P — acting more like a startup — was always coming up with something new and exciting.

Usually, big tech firms tend to devote most of their efforts to defending existing markets, rather than creating new ones. Semiconductors, for example, didn’t emerge from firms that were leading the electronics and transistor market at the time, such as Zenith and RCA. Instead, they came from once unknown startups such as Intel and Advanced Micro Devices. Ditto with Internet routers and servers. They didn’t come from established telecommunications and computer giants such as AT&T or IBM, but rather from newcomers such as Cisco and Sun.

It’s a natural cycle in Silicon Valley, where the leaders of old markets often grow fat and dysfunctional, creating an opening for nimble newcomers with cooler technology and more highly motivated workers. H-P avoided that trap for decades, primarily because of the enlightened management philosophy of the company’s respected founders.

That’s why the rest of H-P’s shareholders should join heirs Walter Hewlett and David W. Packard in voting to scuttle the deal. It may be the only way to prevent H-P from joining the ranks of techno-dinosaurs, firms that once were important but have since faded into history.

Admittedly, the younger Packards and Hewletts have not spent the last few years running a major tech firm. But they did grow up listening to and learning from their incredibly accomplished fathers. Far more than Carly Fiorina, H-P’s chair, president and CEO, they seem to understand that the only way a tech firm can stay near the head of the pack is by nurturing the process of innovation.

Big mergers, on the other hand, can have a devastating side effect on creativity within tech firms. Cutting costs becomes the main way profits are increased. As a result, the fear factor engendered among employees in such environments frequently undermines the future competitiveness of whatever operation remains.

As a tech reporter, I’ve seen it happen many times, whether it was Compaq’s disastrous 1998 acquisition of mainframe-computer maker Digital Equipment Corp., which most observers agree was an absolute failure, or AOL’s more recent takeover of Netscape, which moved the latter company from a tenuous position to one of near total irrelevance.

Death as a side effect of consolidation is a pretty common business obituary. During the last big economic slump, between 1970 and 1981, for example, nearly 30 percent of the American companies on the Fortune 500 dropped off the list entirely as a result of mergers and breakups. ITT, to name just one, all but evaporated. One of the last large-scale studies of the phenomenon, conducted in 1987 by famed Harvard University business-school professor Michael Porter, revealed that a majority of the major corporate acquisitions made prior to 1980 performed “dismally.” More than half of the adopted firms, Porter found, were either jettisoned or abandoned by their corporate buyers within seven years.

Typically, the mergers failed because of corporate indigestion. Companies have trouble staying focused on fast-moving commercial markets when they are busy burping up redundant employees and products.

A small handful of companies — GE comes to mind — have been able to make the job-shedding growth-by-acquisition strategy pay off for more than just a few quarters. But for most of the others, the bigger they got, the harder they fell.

And yet, many corporate executives keep making the same dumb moves.

The reason for that is pretty simple. Unlike H-P’s founders, these days most corporate executives don’t spend very much time thinking about the next few decades. They’re focused on only the next few months.

If a company’s quarterly results improve, its stock usually goes up, which makes shares in the company — including executive stock options — more valuable. Today, the main goal of many top tech executives seems to be to boost the stock price of their companies just long enough so they can cash out and move on to the next big firm waiting to be looted, or, better yet, to a cushy post in government or academia.

It’s a game the mostly white, mostly male big-company CEOs have been playing for the last few decades, a period that coincided with general acceptance of the counterproductive notion that employers have few if any obligations to their employees. It’s a management philosophy that would surely have left H-P’s founders aghast.

Perhaps unfairly, many observers had hoped that Fiorina, being female, might bring a different, less testosterone-driven leadership style to a major Silicon Valley firm. It was exciting to see Hewlett-Packard give her that opportunity — a hopeful sign that the company might have been seeking a nontraditional type of leader capable of returning the company to its roots. When she took over the company, Fiorina promised as much in a national-TV ad staged at the famous Palo Alto garage where H-P got its start.

Ironically, it seems Fiorina broke though the glass ceiling only to demonstrate a less savory aspect of gender equality — namely, that a female CEO can be just as ruthless and shortsighted as a man. (To be fair, Fiorina would undoubtedly also have been harshly criticized for “not being tough enough” had she not followed the traditional male management pattern. Basically, she was damned if she did, and damned if she didn’t.)

Either way, the growth-through-acquisition strategy often backfires over time. The entire culture of a company changes when it becomes primarily a consolidator. As the research has demonstrated, taking that fork in the road often leads to companies getting their names posted on milk cartons.

As H-P’s founders knew so well, very few employees will bring their best ideas, or their best efforts, to a workplace where they are treated like a disposable office supply. When the sense of teamwork evaporates, workers look out for themselves first and the company second.

In Silicon Valley, though, the most exciting growth stories happen when talented teams introduce revolutionary new products and services. That rarely occurs in workplaces where employees are forced to spend most of their time looking over their shoulders and covering their asses.

In a culture of corporate consolidation, the primary goal is to avoid getting fired and to continually prove individual indispensability. As a result, employees don’t share ideas freely, work well in teams or take risks that might expose them to criticism. That behavior hurts the group. Why give a colleague a tip about how she can do her job better if it means you might get fired instead of her? And don’t forget the importance of taking credit for every good idea your subordinates may have. You can imagine the wonders that does for an organization’s efficiency.

There are few things worse, or more counterproductive, than assembling employees in a circular firing line. Not surprisingly, the best talents rarely want to work under such conditions.

Much is made of the fact that Steve Wozniak was working for Hewlett-Packard in 1975 when he created what went on to become Apple’s first personal computer. The fact that an H-P executive initially passed on commercializing his invention is often cited as an example of executive blundering, which may well have been the case.

But what’s more important is that back then, talented technical artists such as Wozniak wanted to work at Hewlett-Packard, which everyone in Silicon Valley knew was the place to be. Wozniak frequently described working at H-P as his “dream job,” one he was reluctant to leave.

Back then, employees could walk right up to the company’s approachable founders, who frequently dined in the workers’ lunch room, to discuss the ideas and projects that would eventually lead H-P from one lucrative growth market to the next. If you think about it, though, you realize it’s been a painfully long time — roughly coinciding with the end of those lunches — since anything really new came out of Hewlett-Packard.

Wozniak isn’t looking for a job these days, but it’s a sure bet some young tech geniuses are thinking right now about where they should take their best ideas or apply for employment. My guess, though, is that people with visionary ideas will probably look past firms that have decided the best way they can make money is by throwing people out of work.

Instead, the inventor of the next big thing will probably be hoping to find, or perhaps create, an environment where talent is nurtured, where new ideas are encouraged and supported, where workers are respected and treated well and where top management understands how individual creativity and teamwork are best enhanced.

In short, he or she will be looking for what Hewlett-Packard used to be.

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